Finance Exam 3

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17 Terms

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FICO

Your credit score, uses credit information, components include: credit history, new credits, type of credit used. Looks at PAYMENT HISTORY.

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Annual % Rate

The true rate of interest over the life of a loan including all fees + costs. 

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Average Daily Balance

A way to compute credit charges by applying interest rates to average daily balance.

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Consumer Loan

Loans made for specific big ticket items, using formally negotiated contracts. Can have fixed or variable loan interest rates.

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Single Payment Loan

Type of consumer loan, set over a specific period, at the end of which full payment (principal + interest) is due in 1 lump sum, short-term.

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Installment Loan

Type of consumer loan, repaid in series of fixed/scheduled payments, to pay full payment (principal + interest)

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Chattel Mortgage

Component of a loan. The property, secures the loan, and the lender holds an ownership interest. Commonly referred to as security agreements.

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APR Equation

Average Annual Finance Charge / Average Loan Balance Outstanding.

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Simple Interest Method

Calculated on outstanding balance, with the lowest APR (Interest = Principal x Rate x Time)

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Discount Method

Calculated on beginning principal, SUBTRACTED from loan amount. 

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Add on Method

Finance charge computed on the original loan amount and added to principal (most expensive).

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Rule of 78

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Secured (Collateralized) Credit Cards

Type of credit card that requires a cash deposit as collateral, useful for people with poor or little credit.

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Character, Capacity, Capital, Collateral, Conditions.

5 C’s of Credit

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Truth in Lending Law

Requires lenders to disclose: the true annual interest rate (APR), and the method of calculating the average daily balance

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Bankruptcy

Happens if you misuse credit, either solved through debt restructuring w/ payment plan, or straight bankruptcy w/ wiping the slate clean. Negatively impacts credit for up to 10 years.

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Home Equity Loan

A second mortgage using home equity as collateral; interest may be tax-deductible if used for home improvements and itemized.